New market for bonds and receivables augments firms’ ability to raise capital

Greek banks and other companies have so far relied on traditional forms of funding such as bond issuance and loans to finance their growth. The passing of a new law in June which allows the securitization of future receivables and real estate means they now have more tools at their disposal to maximize their shareholders’ return.

Although the European securitization market came to life in the mid-1980s, first in the United Kingdom before spreading to other continental countries such as Germany, France and Italy, it did not make it to Greece. All efforts to create a local market by first securitizing mortgage loans ran into a number of problems. Some were legal in nature since legislation did not address the issue, some practical in the sense that banks had not bothered to categorize their mortgages according to certain criteria, i.e. maturities, and some related to tax legislation and prevailing macroeconomic conditions.

Interest earned on corporate bonds was taxed at a higher tax rate than government bonds until three-and-a-half years ago, making corporate bonds, including mortgage bonds and asset-backed securities less attractive. In addition, Greek banks were able to rely on their deposit base for cheap funding and tapped the hot Athens stock market occasionally in the late 1990s to boost their capital base.

Of course, things have changed since then. Banks have experienced double-digit and even triple-digit growth rates since 2000 and have been forced to take a number of hits linked to equity holdings they acquired during the heydays of the stock market. This combination has put pressure on their capital adequacy ratio and forced them to look for alternative ways to boost their Tier I and Tier II capital, mainly in the form of subordinated securities and hybrids which combine the characteristics of stocks and bonds. But rebuilding their capital via these vehicles has not come cheap in most cases.

Lately, two large banks have tried to shore up their capital base, increase their liquidity, post some small capital gains by selling part of their treasury stock, and possibly get ready for another round of consolidation in the banking sector.

Following Alpha Bank’s move to place a good chunk of its own treasury shares with institutional investors around September 10, Piraeus Bank did the same last week, raising more than 350 million euros between them. The state agency DEKA followed suit by selling 11 percent of National Bank shares to foreign and institutional investors for more than 490 million euros. Of course, DEKA’s goal was different, to raise cash to reduce the huge public debt.

Greece’s public debt exceeds 100 percent of GDP and remains one of the highest in the European Union (EU), fanning concerns about the country’s long-term growth prospects. The high debt-to-GDP ratio is one of the main reasons Greece has the lowest credit rating in the 15-member EU and the same rating as other former communist countries joining the bloc.

Ironic as it may sound, it was the securitization of future receivables which led to the Eurostat-induced upward revision of the country’s public debt-to-GDP ratio in 2002. Greece had made extensive use of securitization, estimated cumulatively at more than 3.8 percent of GDP, during the 2000-2002 period, to reduce its public debt, but Eurostat ruled in 2002 that securitization proceeds along with others (prometoha) should be reclassified and added to public debt. This pushed public debt to over 107 percent of GDP in 2001 and 105 percent in 2002. Greece is struggling to bring it below 102 percent of GDP this year.

Gov’t monopoly broken

Regardless of the government’s use of securitization, the importance of the new securitization law should not go unnoticed. In a recent report on Greece, Moody’s pointed out the importance of the new legislation “which broke the government’s monopoly on securitization transactions.”

“The most significant recent development in the Greek market is the introduction of a new law which came into effect from June 25, 2003,” Benedicte Pfister, senior vice president at Moody’s and co-author of the report, was quoted as saying.

Already, some banks have taken steps to take advantage of the new legislation to obtain liquidity and release capital in order to make further inroads into retail banking and/or boost their capital adequacy ratio, starting with mortgage loans, credit cards and consumer loans at a later stage. Depending on the form of securitization, they can also use it to cover their funding gaps and even earn fees provided they acquire the skills to become underwriters and advisers in issues of asset-backed securities.

In addition to banks, corporations can also benefit for different reasons. They can have an alternative source of funding, which in some cases may even lead to lower costs of funding than bank loans or corporate bonds entail.

Securitization can even help small and medium-sized companies with no credit rating from the large international credit agencies to enter international capital markets anonymously, something impossible via other means. Since securitization is categorized as “off balance sheet item,” corporations can use it to reduce their debt-to-equity ratio, something useful for heavily indebted firms. Finally, but not least, local investors can get familiar with another class of investment instruments, which allows them to differentiate their portfolios.

Greek banks, corporations and investors stand to benefit by the development of this new market for asset-backed securities. The new securitization law opens a window of opportunity, but it is up to them to exploit it to the full.

Already, some are doing so and they are the ones who will be the first to reap the corresponding benefits.